Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Regulation Impact Statement
Policy objective
3.1 This modification will correct the unintended consequences of the 1992 legislation which aimed to streamline the sales tax law. The explanatory memorandum to the ST (E & C) Act stated that the new Item 20 represented 'no substantive change' from the previous exemption when using the phrase 'of a kind ordinarily used' in place of 'of a kind used exclusively or primarily and principally'. There was a clear intention by the Parliament in 1992 that the exemption for industrial safety equipment was not intended to be widened from its original narrow scope. However, several Federal Court decisions have not adopted this view. The result is that a wide range of goods that were not intended to be exempt may now qualify for the exemption. Additionally, retailers may obtain a windfall benefit if credit claims are allowed in respect of goods that were not intended to be exempt.
Implementation options
3.2 The following 2 options include the modification proposed by these Bills and the major alternative. In both cases, the options feature the introduction of a 'mainly' test from the date of announcement (in Option 1 the test applies from an earlier date) as there is no alternative implementation option to this. However, the options explore the 2 alternative treatments of claims for credits in relation to dealings before then.
Assessment of impacts
3.3 This option will modify from 1 January 1993 the relevant sales tax provisions by restricting the exemption to goods mainly used as industrial safety equipment. In addition, claims for credits lodged before 5 October 1999 will be allowed if the taxpayers can show that the benefit of the credits have, or will be, passed on to the end users of the goods. Finally, for taxpayers who have not paid sales tax on a self-assessment basis in relation to dealings before 5 October 1999 and who satisfy the 'ordinarily' test, there will be no additional obligations.
3.4 Wholesalers can be broken down into 3 main groups based on the impact this option will have upon them as detailed below.
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- Wholesalers who have been collecting and remitting sales tax in relation to the equipment in question (i.e. those who have adopted the Parliament's intended application of the exemption provision) and have not claimed credits in relation to these dealings will not be noticeably impacted by this measure. This group represents the majority of wholesalers.
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- Wholesalers who have not paid sales tax on a self-assessment basis in relation to dealings before 5 October 1999 and who satisfy the 'ordinarily' test, will be subject to no additional obligations. However, for dealings on or after 5 October 1999 there will be a requirement for them to remit the relevant sales tax unless they satisfy the 'mainly' test.
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- Wholesalers who have claimed a credit of sales tax paid in relation to dealings before 5 October 1999 will be allowed this credit if they lodged the claim before that date, can satisfy the 'ordinarily' test and can show that the benefit of the credits have, or will be, passed on to the end users of the goods. This may impose merely an evidentiary burden on relevant taxpayers who have already passed on the benefit but may also lead others to establish sales tax refund arrangements for end users. The wholesalers in this group comprise mainly those in the sunglasses, air conditioning and scaffolding industries.
3.5 In instances where wholesalers have claimed credits prior to 5 October 1999, retailers may find that they become involved with end user refund arrangements aimed at ensuring that wholesalers are able to satisfy the requirements of the credit scheme proposed by the modification Bills.
3.6 Given that goods that satisfied the 'ordinarily' test would be exempt if the taxpayer lodged a claim for a credit before 5 October 1999 and could show that the benefit of the credits have, or will be, passed on to the end users of the goods, some end users may benefit from a refund of the proportion of the sale price that represented sales tax.
3.7 The ATO will experience an increase in requests for advice as a result of the modification Bills being enacted. It will also be required to investigate claims for credits where the claimant asserts that the criteria have been satisfied.
Private sector tax professionals
3.8 This group may experience an increase in their workload as they attempt to understand the modifications and provide advice to affected clients.
3.9 As outlined in paragraph 3.4 the majority of relevant taxpayers will not be noticeably affected by this proposal as they adopted the intended narrow view of the Item 20 exemption. However, other taxpayers may wish to establish end user refund arrangements, which may be costly and may also involve retailers. It is unlikely that such arrangements will be established for such items as sunglasses, due to the high volume of transactions, comparatively low cost of individual items and the difficulty in providing refunds to end users who will not be readily identifiable from retail records.
3.10 The compliance costs for this measure cannot be reliably quantified because it is uncertain how many people will be affected to the extent that they will incur compliance costs.
3.11 The administrative costs to the ATO of this proposal relate mainly to advising clients on the application of the proposed modifications and to processing those credit claims that were lodged before 5 October 1999. However, as the number of people affected cannot be quantified, the administrative cost is also not possible to quantify.
3.12 The revenue at risk if this modification is not enacted could be in excess of $2 billion. This figure assumes that without a modification to give effect to the Government's announcement on 5 October 1999, substantial credit claims could be lodged by taxpayers involved in a significant number of industries for dealings over the previous 3 years. This option will see these risks reduced significantly by limiting the circumstances in which credit claims can be made. The value of credits that will be paid depends on the individual circumstances of the relevant taxpayers and it is not possible to quantify.
3.13 The second option to give effect to the Government's policy would be to impose the 'mainly' test prospectively from the date of the Government's announcement on 5 October 1999. In addition, claims for credits lodged before the Government's announcement would be allowed if the taxpayer proved that the benefit of the credits have, or will be, passed on to the end users of the goods. In order to address those claims for credits in relation to dealings before 5 October 1999 but lodged after than date, a windfall tax would apply wherever a credit was paid. The amount of the windfall tax would be 100% of the credit claimed.
3.14 The groups impacted under Option 2 are the same as under Option 1.
3.15 The compliance costs of Option 2 are essentially the same as Option 1, except that the legislation would be more complex and therefore would require a greater need for professional advice.
3.16 The ATO would be further burdened by Option 2 than it would be by Option 1 because Option 2 would require claims for credits to be notionally paid and then the windfall tax would have to be imposed. There would be a requirement to establish an accounting system for such credits and debits on the accounts of taxpayers. It would also be necessary to produce notices that advise taxpayers of these transactions. The fact that the taxpayers may pre-empt the inevitable result of their credit claims and therefore not lodge such claims would not preclude the ATO having to provide appropriate systems.
Conclusion and recommended option
3.17 The benefits of removing the unintended access to the Item 20 exemption by adopting Option 1 outweigh the costs of this measure. As the majority of those potentially affected by this measure have dealt to date on the basis of the Parliament's intended application of the sales tax law, the obligations imposed on them as a result of this proposal are limited. However, the potential risk to revenue if the Government did not seek to redress this anomaly is significant.
3.18 In relation to the 2 implementation options, Option 1 is recommended. While both options would effectively have the same result, Option 2 would involve a more complex legislative solution than Option 1. Option 2 would also require significant additional administrative resources.